Show Me the Liquidity: IPOs Happen for ONLY One Reason

The New York Times reports today that there is a pipeline of large, privately held companies looking to go public:

Some 161 companies are seeking to raise more than $56 billion through initial public offerings, according to Renaissance Capital, an I.P.O. research firm. That is the most companies in the I.P.O. pipeline since 2000 and the largest pent-up dollar amount on record.

The Times notes that these companies are large and established companies, such as General Motors and Toys R Us. It may be true that the difference between this pipeline of aspiring public companies and those of the dot-bomb era are the size and scope of the companies in question. But, just because a company is large doesn’tmeanitneedstobepubliclytraded. (For a more complete list of America’s largest private companies–as of 2008–go here.)

In short, the size and scope of a company have little to do with its need to tap the public markets. More often, the reason that companies go public is that the companies’ founders or major investors want to provide themselves with liquidity. Or, more Orwellian: they want an “exit strategy.”

It is odd, then, to read the following quote from one John A. Chirico, “a senior capital markets executive at Citigroup”, in the New York Times article:

“This I.P.O. market isn’t like 2000, where companies needed to raise money for unproven drugs or whiz-bang technology,” said John A. Chirico, a senior capital markets executive at Citigroup. “Most of the companies in the pipeline today are proven businesses, and many have the financial flexibility to stay private.”

The article goes on to note that, despite businesses’ ability to stay private, it is nonetheless major investors’ desire for liquidity that is inducing these firms to go public:

Still, private equity firms are eager to sell stock in their holdings. In some cases, the firms plan to use the proceeds to improve their companies’ balance sheets, paying down the huge amounts of debt they borrowed to go private. In other instances, the companies want to return money raised from the I.P.O. back to their private equity owners, who have largely been unable to bank profits over the last two years.

And in the case of a G.M. offering, the government is eager to sell down its stake.

Unclogging the I.P.O. pipeline would also help dozens of other private-equity-owned businesses that have explored tapping the public markets. In recent months, bankers have met with buyout firms about possible offerings for some of their biggest investments, including Freescale Semiconductor and Michaels Stores, according to people briefed on the discussions.

In short, companies are looking to go public now for the same reason that they sought to go public back during the dot-bomb bubble: their investors want liquidity.